A little bit of time on from a historic cut in interest rates and the question is, are you feeling richer yet?
Don’t be surprised if the answer is “no” – particularly if you are a would-be pensioner (most of us) or a saver (a lucky few).
Or a wine drinker – have you seen how much more a bottle of Spanish plonk costs since the pound fell?
The Bank of England’s decision to cut interest rates to just a hair’s width above zero should really be a cause for concern. Although everyone and her dog expected it to happen, thanks to the Bank’s wink and a nod approach to monetary policy, “forward guidance”.
But the Bank also pulled a rabbit out of its hat – another £170billion of of cash – most all of which will be handed to those bastions of prudence and long-term thinking, the banks. (Not).
For the most part, a cut in the interest rate to 0.25 from 0.50 won’t make a jot of difference for most folk. It could be that a few people with a tracker mortgage might pay a little less each month, when banks eventually get around to sharing it out to customers. Good old state-backed Royal Bank of Scotland was the first to indulge its mortgage payers, but then that was announced on the same day it revealed a £2billion black hole in its finances. And that was just in its first half of the year.
Of course, the Bank of England’s monetary “bazooka” was largely applauded by business groups. But what we heard was mainly the same noises turkeys make when they vote against Christmas.
In the week before the Bank’s lending rate cut and quantitive easing boost, the economic indicators on manufacturing, construction and the services sector had been dire. Not surprising, considering there were the first sets of statistics to emerge after the UK announced it was filing for divorce with its biggest trading partner.
Then Brexit launched a torpedo at spending and hiring intentions. Then the cranking up again of the Bank’s money making machine sunk the value of the pound.
The likes of the CBI assured us an expansionary fiscal policy would “put the UK on a stronger growth path”, that the cut would “fully benefit” business and households, and the banks would find it “easy” to spread the cash around more this time.
I have my doubts about bank largess, I have to admit. This is mainly because in the last seven years of money printing – now at £435billion – we are still just hovering above the bottom, economically speaking. Lending has been frugal and spending and investing by companies has proved a pipe dream no matter how much cash has been sloshing around the system.
If you have ever wondered where all this money comes from, it comes from the future. Reports indicated that the gulf between pension liabilities and the amount of ready cash available to pay them reached a record high of £935billion in the wake of the Bank’s interventions. This was despite a bounce in the value of stocks and shares, which pension fund managers worth their (very expensive) salt should have been making a mint of.
It’s true that something needed to be done. The Bank of England has a few big tools at its disposal to deal with economic shocks like Brexit which it deployed, for better or for worse. Some have even called for more fabulous interventions, like so-called helicopter money.
Instead of £60billion of electronic money flushing the system and lining the gizzards of the banks – why not just hand every man woman and child in the UK £1,000 each see how that works. Sure some might save it, although with interest rates so low they would have no incentive to. Instead they could spend it, pumping cash into the desiccated high street or on Amazon or whatever. It’s an interesting idea, but one that pushes to the brink of economic coherence as we know it.
Yet since the banking crisis, we have been living in an economic Alice in Wonderland anyway. But we should perhaps consider the rule of Wonderland’s White Queen when considering the need for prudence to sustain our economic future: “Jam tomorrow and jam yesterday, but never jam today”.
